Analysis: Florida’s Insurers, Reinsurance and Catastrophic Storms

Since 1996, Demotech has rated most of the homegrown Florida domiciled insurers. Our efforts have focused on the assignment of Financial Stability Ratings® (FSRs) to all financially stable insurers, start-ups as well as established insurers. The top two writers are Citizens Property Insurance Corp. and State Farm of Florida, which together write approximately 30 percent of the homeowners insurance premium in Florida. Demotech does not follow these two insurers but does follow 47 insurers writing approximately 70 percent of state’s homeowners’ insurance premium. The following is a brief summary of Demotech’s analysis of 2011 and 2012 catastrophe reinsurance in the Florida market.

Many Small Carriers

Private insurers are scrutinized, at least quarterly by independent rating services. Although small insurers rely on the quality and quantity of their reinsurance protection to compete against larger carriers, they must also sustain balance sheet integrity.

When operating results do not sustain the required level of policyholders’ surplus or when reported financial results do not meet our requirements, Demotech requests a capital infusion to bridge the time period required to obtain an improvement in operating results through changes in procedures, processes or rate level. To comply, carriers infused more than $268,000,000 in 2010 and 2011.

Impact of Catastrophe Models

The Florida Commission on Hurricane Loss Projection Methodology was created in 1995 to be independent experts evaluating computer models and actuarial methodologies projecting hurricane losses. Demotech does not endorse or require an insurer to utilize a particular hurricane loss projection modeling company; however, Demotech does consider the version of a model to be important. The accompanying graphs summarize the catastrophe models utilized to evaluate 2012 exposure.

How Much Reinsurance Is Enough?

Despite the limited likelihood of a once-in-a-century catastrophe, Demotech requires carriers to purchase reinsurance to the 1:100 probable maximum loss (PML) level. The graph is a comparison of the 2011 versus the 2012 storm seasons. Many of the carriers that Demotech rates purchase reinsurance in excess of the 1:100 PML.

What About Citizens?

Citizens purchases markedly less reinsurance than a private sector carrier. Although cost savings occur when the wind does not blow, the cost of catastrophes that have occurred are borne by Floridians. Floridians pay assessments added to their insurance premiums. Insurers recoup these charges by adding the cost to the premiums. Insurers remit the assessments to the state.

Observations

Citizens was expected to be a market of last resort but it has grown to become the biggest writer, growth that has been fueled by rates that are below the actuarial indication. When a market of last resort is inadequately priced and its competition is focused on adequate pricing, consumers respond by purchasing the cheaper alternatives.

Citizens’ rate structure relies upon Floridians, not private sector reinsurance, to pay claims related to a catastrophe. Private sector insurers purchase reinsurance, including that mandated through the Florida Hurricane Catastrophe Fund to pay claims related to a catastrophe.

Although an often-stated goal is a reduction in the size of Citizens, a review of 2011 versus 2010 indicated that Citizens’ homeowners’ premium grew by nearly 36 percent, three times the rate of the homeowners insurance market.

Final Thoughts

Private sector insurers are subjected to regulatory and rating service scrutiny. In a 12-month period, the insurers reviewed by Demotech are subjected to four quarterly financial reviews plus a review of catastrophe reinsurance coverage. The quality and quantity of catastrophe reinsurance is vital to a regional carrier. When operating results are unacceptable or financial expectations are not met, Demotech requests that capital be infused.

The Florida Hurricane Catastrophe Fund, created in 1993 after Hurricane Andrew made landfall, was formed to maintain insurance capacity by providing reimbursements to insurers for a portion of their catastrophic hurricane losses. Entering the 2012 storm season, the FHCF had approximately $17 billion in potential exposure with nearly $9 billion in invested assets on hand. If a storm occurs and the FHCF experiences a shortfall because its reimbursement is greater than assets on hand, the FHCF would issue additional debt to cover the shortfall. The additional debt would be amortized through another assessment on Floridians purchasing assessable lines of business.

Debt incurred by the FHCF is amortized by assessments on Floridians who purchase an insurance policy providing coverage for assessable line(s) of business. The assessment is collected by insurance carriers and remitted to the state. To the extent that the FHCF has insufficient assets to respond to its reinsurance responsibilities, Floridians will be assessed to amortize funds borrowed by the FHCF.

In the FHCF’s fiscal year ending June 30, 2011, the emergency assessment of 1.0 percent of premium, levied to finance revenue bonds issued in 2006, 2008, and 2010, was increased to 1.3 percent on policies written or renewed after January 1, 2011. The FHCF estimates that it will be 2016 before that debt is paid off.

From its admission as a state on March 3, 1845 through June 30, 2010, Florida had accumulated approximately $28 billion of debt. In comparison, the annual exposure of Citizens and FHCF has been estimated to be $10 billion per year. To the extent that liabilities of Citizens or the FHCF must be funded, the repayment requires the issuance of additional debt, with the cost of borrowing and repaying funded by Floridians who purchase assessable lines of insurance.